Top Five Small-Cap Stocks

Each business day, TheStreet.com Ratings compiles a list of the top five stocks in five categories -- fast-growth, all-around value, large-cap, mid-cap and small-cap -- and publishes these lists in the Ratings section of our Web site.

This list is based on data from the close of the previous trading session. Today, small-cap stocks are in the spotlight. These are stocks of companies that have market capitalizations of between $50 million and $500 million that rank near the top of all stocks rated by our proprietary quantitative model, which looks at more than 60 factors.

The stocks must also be followed by at least one financial analyst who posts estimates on the Institutional Brokers' Estimate System. They are ordered by their potential to appreciate.

Note that no provision is made for off-balance-sheet assets such as unrealized appreciation/depreciation of investments, market value of real estate or contingent liabilities that might affect book value. This could be material for some companies with large underfunded pension plans.

Exactech ( EXAC) develops, makes, markets, distributes and sells orthopedic implant devices, related surgical instrumentation and biologic materials to hospitals and physicians in the U.S. and 27 other countries. The company produces knee systems and other joint replacements. Exactech's revenue is derived primarily from sales of its knee- and hip-replacement systems; however, revenue from the worldwide distribution of biologic materials has increased as a percentage of the company's total revenue.

Exactech has been rated a buy since March 2007, primarily because of the company's strong financial performance, higher guidance and a currently favorable industry trend. In the third quarter of 2007, net sales increased 23% year over year to $30 million, largely because of the success of new products and continued growth from existing products.

Exactech performed well in both domestic and international markets on the revenue front; the company reported a 24% increase in revenue from the domestic market and a 21% increase in revenue from international markets. Management raised its fiscal 2007 guidance and now expects revenue between $120.5 million and $122.5 million, with earnings in the range of 78 cents to 79 cents a share.

We expect Exactech to benefit from its continued innovation and expansion. It remains focused on improving its existing line of business, and it is also awaiting approval on several new products in both the U.S. and overseas markets. However, the company is highly exposed to foreign exchange risks with its increasing share of global business, and stiff government regulation could negatively affect product approvals and therefore operating results.

CAM Commerce ( CADA) provides a variety of software, hardware and other technical systems for retailers. Our buy rating, in place since February 2006, is based on positive investment measures such as strong revenue growth, a solid financial position and stock performance and growth in net income.

Powered by strong earnings growth of 70% during the first quarter of 2008, this stock has surged 64% over the past year. Revenue rose 37% year over year for the first quarter. CAM Commerce has no debt to speak of, giving it a debt-to-equity ratio of zero, which we consider a favorable sign. Net income increased 75% from the year-ago quarter.

Finally, the company has demonstrated an impressive pattern of positive EPS growth over the past two years. Looking forward, we feel that this trend should continue.

Balchem ( BCPC) develops, manufactures, and markets specialty performance ingredients and products for the food, feed and mechanical sterilization industries. Balchem produces choline products for both human and animal consumption. Choline, a vitamin-B complex, plays a vital role in the metabolism of fat and the building and maintaining of cell structures.

Choline deficiency can result in reduced growth and perosis (a disease characterized by a deformity of the leg joint) in poultry and fatty liver, kidney necrosis, and general poor health in swine, among other symptoms. In humans, choline is recognized as playing a key role in the structural integrity of cell membranes, the processing of dietary fat, reproductive development and neural functions such as memory and muscle function.

Balchem also produces encapsulated performance ingredients for use throughout the food and animal-health industries in end products such as baked goods, refrigerated and frozen dough, processed meats, seasoning blends and confections. These performance ingredients are used to enhance nutritional fortification and improve shelf life of prepared products.

Our buy rating for Balchem has not changed since June 2003. The company's strengths can be seen in such areas as impressive revenue growth, solid stock-price performance, and net income growth. For the fourth quarter of fiscal 2007, revenue more than doubled year over year. This growth appears to have trickled down to the bottom line, as earnings per share improved 27% in the same period. Net income also increased by 29% to $4.16 million. Powered by its strong earnings growth and other factors, this stock has surged 28% over the past year.

For fiscal 2007, management was pleased with the integrations of two earlier acquisitions, Chinook and Akzo, and it expects those acquisitions to continue to contribute positively to Balchem's earnings. However, management also expects rising raw material costs to be a challenge in the near term.

While the company has taken pricing steps to counteract the effects of these increased input costs, such actions in the fourth quarter were not enough to offset them completely. Additional price increases were made effective in January 2008, and management therefore expects fiscal 2008 to see continuing improvements in sales and earnings, while cautioning that global economic issues could affect the company's results.

Hooker Furniture ( HOFT) imports and manufactures furniture for residential use. Founded in 1925, the company is one of the few furniture firms still led by a member of its founding family.

Hooker's principal customers are retailers of residential home furniture located throughout North America. These customers include independent furniture stores, specialty retailers, department stores, catalog merchants and national and regional chains. The furniture is marketed under the Hooker Furniture and Bradington-Young brand names.

More recently, the company purchased Sam Moore Furniture, a Virginia-based specialist in quality occasional chairs. Hooker also imports products from China, the Philippines, Mexico, Indonesia, Vietnam, Honduras and Guatemala. These products are all designed by Hooker to conform to the company's standards. The company has about 1,000 employees.

We have rated Hooker a buy since February 2007. The company's record of earnings growth, its improvement in net income and its solid financial position all contribute to our rating. While revenue dropped 9.5% year over year for the fourth quarter of fiscal 2008, Hooker improved EPS by 35% during the same period. Net income also increased in the fourth quarter, growing 30% to $4.6 million. Finally, the company's very low debt-to-equity ratio of 0.06 implies that there has been successful management of debt.

Looking forward to fiscal 2009, management expects business to remain challenging, but feels that Hooker has proved its ability to stay profitable in the current economic environment. The company is implementing numerous efforts to grow its business, including opening a West Coast distribution center and developing new product categories through recent acquisitions. The company is also attempting to eliminate waste, create value, and operate more efficiently in all its processes.

Bear in mind that Hooker's future results could be affected by the cyclical nature of the furniture industry, risks associated with the cost of imported goods, and transportation and distribution disruptions, among other risk factors.

Interface ICs transfer, route and time electrical signals among a system's microprocessor, memory, and various peripherals and between interconnected systems. FCPs are electronic components used as time and frequency clocks in electronic products ranging from computers and telecommunications switching equipment to cell phones and televisions. Pericom Semiconductor's interface products increase system bandwidth.

The company reported that its earnings for the second quarter of 2008 surged 95%, driven by strong revenue growth. Boosted by strong demand for its high-speed serial protocol solutions used in digital video and other products, total revenue for the quarter climbed 32% to $40.7 million, vs. $30.8 million in the year-ago quarter.

Net income for the quarter increased to $4.4 million, or 16 cents a share, from $2.26 million, or 8 cents a share, in the second quarter of 2007. The company expanded its ultra mobility solutions by launching two new USB switches that support USB High Speed capability and combine USB High Speed and audio signals for new cell phones and MP3 players.

Looking ahead, management expects revenue for the third quarter to be between $38.5 million and $40.7 million, with gross margin expected to be in the range of 36% to 37%. In addition, the company expects its interest income to be $1.4 million. However, weak demand for semiconductors, higher stock option expense, and a highly competitive market could restrict Pericom Semiconductor's future growth.

Our quantitative rating is based on a variety of historical fundamental and pricing data and represents our opinion of a stock's risk-adjusted performance relative to other stocks.

However, the rating does not incorporate all of the factors that can alter a stock's performance. For example, it doesn't always factor in recent corporate or industry events that could affect the stock price, nor does it include recent technology developments and competitive dynamics that may affect the company.

For those reasons, we believe that a rating alone cannot tell the whole story and that it should be part of an investor's overall research.